Depreciation in Australia 2025: Tax, Cash Flow & Investment Insights

Depreciation isn’t just an accounting buzzword—it’s a powerful tool that shapes how Australian businesses and investors manage tax, cash flow, and growth. With the 2025 tax year ushering in fresh ATO guidelines and evolving economic conditions, understanding depreciation has never been more crucial for savvy Aussies looking to optimise their finances.

What Is Depreciation—and Why Should You Care?

At its core, depreciation is the process of allocating the cost of an asset over its useful life. In practical terms, it recognises that assets like machinery, vehicles, and even some buildings lose value as they age or are used. This isn’t just a theoretical exercise: depreciation directly affects your taxable income, business profits, and investment returns.

Key reasons depreciation matters in 2025:

• Tax deductions: Claiming depreciation reduces your taxable income, lowering your tax bill.

• Cash flow management: Strategic depreciation boosts after-tax cash flow for businesses and property investors.

• Asset replacement planning: Understanding depreciation helps plan for future capital investments.

2025 Depreciation Rules: What’s New?

The Australian Taxation Office (ATO) has introduced several updates for the 2024–25 financial year, impacting how both small businesses and individuals can claim depreciation:

• Temporary Full Expensing Sunset: The generous instant asset write-off and temporary full expensing measures, introduced during COVID-19, ended on 30 June 2024. For 2025, businesses must revert to standard depreciation rules unless new legislation is passed.

• Instant Asset Write-Off Threshold: For 2024–25, the instant asset write-off threshold is $20,000 per asset for small businesses with aggregated turnover below $10 million. Assets over this threshold must be depreciated over time.

• Backing Business Investment Incentive Expiry: Accelerated depreciation for eligible assets installed before 30 June 2023 has now ended. All new asset purchases must use normal effective life depreciation from 2025 onward.

• Property Investors: No changes to the rules for plant and equipment or capital works deductions for residential property, but ATO is increasing audits for over-claimed depreciation.

It’s more important than ever to keep accurate records and understand which method suits your situation.

How Depreciation Works: Methods, Examples, and Tax Impact

There are several ways Australians can claim depreciation, depending on their asset type and business structure. Here’s how the main methods stack up in 2025:

• Prime Cost (Straight-Line) Method: Depreciates assets by an equal amount each year over the asset’s effective life. Simple and predictable.

• Diminishing Value Method: Allows greater deductions in early years, tapering off over time. Useful for rapidly depreciating assets like technology or vehicles.

• Immediate Write-Off: For eligible small businesses, assets under $20,000 can be fully expensed in the year of purchase.

Example: An electrician purchases a $15,000 van in July 2024. As a small business, they can instantly write off the full amount in their 2024–25 tax return, reducing taxable income by $15,000. If the van cost $30,000, only $20,000 could be written off immediately; the rest would be depreciated over its effective life.

For property investors: You can claim depreciation on the building itself (capital works, typically 2.5% per year over 40 years) and on eligible fixtures and fittings (plant and equipment). However, only new or substantially renovated properties allow full plant and equipment depreciation for individual investors.

Smart Depreciation Strategies for 2025

With the return to standard depreciation rules, it’s time to rethink your approach. Consider these tactics:

• Review Asset Registers: Ensure all eligible assets are included—and obsolete assets are written off.

• Time Purchases Strategically: Buying just before year-end maximises first-year deductions.

• Consider Pooling: Small businesses can pool assets to simplify calculations and accelerate deductions.

• Order a Depreciation Schedule: For property investors, a professional quantity surveyor’s schedule ensures every cent is claimed—ATO audits are rising in 2025.

• Stay Alert for Legislative Changes: The federal government has flagged possible tweaks to business tax incentives in the 2025–26 Budget. Keep an eye on announcements that could impact your planning.

Conclusion: Make Depreciation Work for You in 2025

Depreciation isn’t just about compliance—it’s a strategic lever to boost cash flow, reduce tax, and plan for the future. As Australia returns to pre-pandemic depreciation rules, businesses and investors need to be proactive and informed. Review your assets, understand the latest ATO guidance, and make depreciation a key part of your 2025 financial strategy.